But the market is up. stagflation must be good for stocks....

Nice to see that our realistic Fed govenors don't expect housing to recover until late in the year. I don't know when the Fed and the market will start believing the home building spokesman/economist who says that it might take until 2011 before building recovers to last year's levels. Are we talking about the same thing?

So if I undersyood correctly the whole US stock market is going to be subject to one massive private equity buyout. after that there will be no market any more.

and the first to be boght out is SPG - a mall REIT. Just as the consumer is going to be buying more (in malls) because of the excess cash from the buyouts....

There's been some talk on this site and in other articles I've seen recently about a recent increase in rental rates due to the downturn in the housing and more people looking to rent. It seemed to mainly be located in the hotter markets with higher populations ( so they did not have a "glut" of housing units relative to population to push down rates). There was some mention that this will have an effect on the CPI by increasing the equivalent rent ascribed to homeowners (essentially the home boom "stored" the gradual equivalent rent increases, lagging them and their effect on the CPI until the bust hit).

The question I have is does this rise in rents and CPI equivalent rent have a historical basis in past housing boom/busts CR? And are we likely to see an increase in reported inflation because of it.

The glut of unsold condos, townhomes and McMansions here in the Chicago suburbs has yet to push down rents -- though a significant fraction are advertised for rent -- because the asking rents are so far out of line with the market that the units just sit empty. Since condo conversions have reduced the supply of genuinely for-rent housing, and with home sales down about 40% from the 2005 peak there are now more people deciding to rent rather than buy, vacancy rates are down in the genuinely for-rent housing.

One factor is that the people who own the homes now standing vacant bought them exactly because they were unwise and unrealistic, so not only have they overpaid so much they're doomed if they can't get the rents* they're asking, they're also largely the kind of people who will never think that it might be better to drop their asking rent to a realistic level and lose only $1000 a month instead of $2000.

Rents won't drop until those incompetent investors are foreclosed upon and the units migrate into the hands of competent landlords at prices 50% below today's. This will take some time.

*Or sale prices -- most such homes are also listed for sale.

so I figured why the market sold off at 2:00 (after FOMC minutes) and took off up at 2:15

At 2:15 CNBC explained that it was a great reprort.

I guess one can see in a combo of infaltion and low growth stagflation while for CNBC it is "goldi-somthing"

ot mine but too good to pass:

We were making a statement today. The writing was on the wall....China doesn't dictate to the US, and our markets don't sweat their puny little bubble. Get it? Got it?

Now buy with both hands, we've got quite a while to go before the truth forces it's way to the surface. Don't buy CFC though, they already used and abused this POS. It's been milked already. Look for anything with a large short interest, especially those with the largest increase from April to May along with the highest ratio's and you've got yourself a big winner....throw in any M&A activity - whether rumor or real - and you are GOLDEN. Don't look at the stock's financials or fundamentals, don't project into the future, don't be concerned with insane debt levels, insider selling, or doctored accounting, etc - and definitely don't apply logic, b/c those are all Anti-Money making thoughts. Just find the worst sector you can find, such as the REIT's who are a perfect example of absolute garbage being short squeezed to death after 1 massively insider traded M&A deal, and BUY TILL YOU DROP. Hey - it's the american way....

"The question I have is does this rise in rents and CPI equivalent rent have a historical basis in past housing boom/busts CR? And are we likely to see an increase in reported inflation because of it."

Rent is part of the CPI calculation, home prices aren't.

Speaking only from personal experience: San Francisco rents rose steadily in the early-mid 80s as high interest rates kept many out of the housing market. When interest rates moderated in the mid-80s, San Francisco rents essentially stalled for several years as former renters bought homes elsewhere in the Bay Area and reduced the pressure in the SF rental market.

Other scenarios are possible, of course. In the early 90s, a slowdown in housing was accompanied by hard times in California (military spending cutbacks and base closures), which led to record outward migration from high-value areas like Silicon Valley to other states where the economy was better and housing more affordable.

Wow, I could've had a prime mortgage
Why many borrowers who qualified for prime-rate loans wound up with subprimes instead.

Wow, I could've had a prime mortgage - May. 30, 2007

If stocks remain overvalued you will get new supply and this will generate more business spending and activity.

ac - you ever take thermodynamics? Ever hear of something called 'entropy'? Just curious.

The game continues as long as BRIC countries keep loading up on US Treasuries and recycling the dollars.

Add in MBS, and now equities too (Blackstone - PRC deal). And it will continue to continue until it doesn't.

k harris said: "Even though the housing adjustment will last longer than expected, the risk to growth is now seen as having diminished. How come? Doesn't say..."

I think I can answer that. I was noodling-around with the Case-Shiller data today, creating year-over-year monthly growth charts for each metropolitan area. It looks like the vast bulk of the large percentage price-drops are over in the "worst" areas.

Also, take a look at the standard deviations for the growth in the different markets. It'll put the housing "crash" in a whole new perspective.

Sebastia

"It looks like the vast bulk of the large percentage price-drops are over in the "worst" areas."

How did you come to that conclusion? Was it low inventory or loose lending standards?

dryfly said: "Economic forecasting by Sebastien Rorschach..."

You didn't bother to look at the data, did you?

Sebastia

what is the end game for this global liquidity excess?

The 'null set' answer of course is that 'it ends'... how and when is the more interesting non-trivial answer.

That I don't know.

But I do believe we will know it when it does. We won't need CR or tanta to tell us either.

Debt/EBITDA at 8 to 10 times is literally beyond my comprehension capabilties and is awaiting disaster.

risk - do you have more info on this? Credible links & such? Just askin'.

BTW - I took a class as part of my masters program called 'Profitability'... it was really about getting into trouble & turn-arounds but when they called it that no one would sign up for it (who want's to ask their boss for reimbursement for a class called 'Managing the Firm in Crisis' - duh!).

Similar stuff to what we are discussing here. Good stuff, not gobbledy gook.

risk - as far as the gov't debt issue per the USA Today link - I'm not as paranoid about the GAAP application of future liabilities as I am about the current account and immediate deficits... Reason is the 'money' required to cover those 'future costs' will expand or contract to fill the actual consumption available at that time... which somebody will need to produce at the time. A more serious question to ask is will there be enough to consume? And how will we distribute it?

If we produce enough goods & services in the future - no problems. If we don't we're screwed no matter how much 'money' we 'save' now. Savings is not the same as investment. Investment is needed to produce the goods we consume tomorrow. MiniMcMansions don't produce a whole lot.

And you can't produce stuff when you are young and carry it into your old age - all production has a shelf life and none more so than services (which we are increasingly focusing on).

So even if we save money SOMEBODY is still going to have to make the stuff we consume & accept our money in exchange. The only way we are certain that happens is if we can make stuff they want too & our money is backed up by that implied productive capability.

And you can't 'eat the money' unless that money is perceived to be equivalent to a claim against production (by someone, somewhere).

So I'm FAR more concerned about our future productive capabilities & capacity than I am about 'future liabilities' measured in today's dollars.

Not to say that we shouldn't try to 'balance the budget' just that immediate liabilities are far more worrisome to me than way off future liabilities... even if huge.

If stocks remain overvalued you will get new supply and this will generate more business spending and activity.

ac - you ever take thermodynamics? Ever hear of something called 'entropy'? Just curious.

I know a bit about the subject but haven't formally studied it. I do have some formal scientific and enginnering background, so I'd be interested in hearing your point... but it's not immediately obvious to me.

he gov's future liabilities are becoming the consumers current liabilities, thus reducing disposable income and consumption.

That's a major concern... especially considering the shorter maturities of existing debt issuance & increasing rates. A major increase in debt service is likely.

The point about the USA Today article though was lumping existing out of pocket debt with things like future SS & future gov't pensions liabilities which kick in a lot later & trying to cook them all up into nice neat PV.

I'm not saying there is or isn't a problem... just that THAT problem is minor compared to the threat we might not be able to produce anything to buy with those IOUs when the time comes.

You can't say it enough - you can't eat the money... and that even includes gold. Fiat or metal only works in a world of relative surplus. And it only works for YOU if you happen to have a claim of some sort to some of that surplus. Otherwise you are hungry.

I'm concerned that if we don't focus on the basics a little better we won't have a recognized claim to some of that consumption - recognized by the market anyway. Dollar hegemony won't last unless the dollar buys stuff people want... here & abroad. Production from the 'dollar zone' is the only thing that can back up the value of the dollar over time. Gold reserves even diminish (get drawn down) unless infused by wealth from 'production'.

A data point from the consumer front: We spent our usual Memorial Day weekend at Whiskeytown which is about 250 miles north of Palo Alto. We did the return drive home on Monday and the traffic was as heavy as any of the 30 or so times I have made this trip. Big motor homes passing me at 75+ miles per hour and the little guys going even faster. Did not see a CHP anywhere. The price of gas is not slowing down the California consumer as far as I can tell.
The new house one house over from my place in PA just went on the market for 8.5M. Yikes!!!! I see this house as a test case for our local market. If this place sells within 6months then we are back into a hot local market. I am betting that it will sell for something just north of 4M and will be on the market for more than a year. It will be interesting as the owner is a hobby builder as they get 50M a year from daddy to play with.
My tradesman friends as well as the architect tell me they are busy busy busy.
We live in interesting times.

BTW the above "TYX Chart" link doesn't take you to the right place in the chart. Look at the 2003 timeframe.

risk capital,

Thanks for your insight. What you say makes sense to me.

"what is the end game for this global liquidity excess? i can see the BRIC's point of view as feeding the fat capitalist's pigs until they explode, and as the same time i can rationalize with the US's perspective that those stupid BRICs and their soon-to-be worthless IOUs. who is going to blink first? and who really gains in the interim?" [zorro]

In my opinion, China has gained the speed it needs to take off on its own. The U.S. consumer is faltering, and that will cause the Chinese and other Asian economies to falter also. But their momentum is such that Asian consumption will supplant U.S. consumption and the Asian economies will continue to grow, as the U.S. tries to figure out how to get back in the game.

I agree that these are interesting times, and these thoughts are just off the top of my head. My issue of "National Geographic" arrived today, and there is an article describing absolutely incredible growth in China (the province of Zhejiang in particular)...

dryfly,

Your comments cut right to the heart of the matter. Productive capacity and investment for the future (e.g. in basics such as food) are the most important. The entropy point is well taken also. Spending money because money is available is apt to prove wasteful.

ac,

I appreciate your looking at possibilities that are not your instinct and first impression. That's why I come here to CR -- the commenters are intelligent and not afraid to consider differing points of view.

http://www.nni.nikkei.co.jp/CF/FR/TNKS/nikkeinews.cfm

Japanese Sold Net Y445.5bn Of Foreign Bonds Last Week

Dryfly, I think your entropy may have some merit. I'm doing some reading on the subject now so I can comment on it more intelligently.

REO going up: 8,593 REO's listed for sale Total Asking Price: $1,666,778,050 - Countrywide Foreclosures (REO) Blog 

So who bought all those bonds that japan has sold ?

Hay guys, what's going on in this Wall Street Journal headline?

Circuit City is thinning its management ranks and accelerating store growth to cope with competition and falling prices. 12:03 a.m.

Complete nonsense. They meant to say stagflationary rising prices.

And who expands capacity to cope with falling prices? That just makes it worse.

Didn't we learn that lesson during the Depression?

take a look at ABX-HE-BBB- 07-1

ABX-HE-BBB 07-1

Markit Homepage 

UK:

A million debtors face court action - Telegraph

About the issue of ARM reset:

I have this "feeling" ( I can not prove) that most banks would just rather create a re-fi ability to the borrower instead of ending up with REO.

The Mortgage Bankers' Association estimates that up to $1.5 trillion of adjustable rate mortgages are scheduled to reset upward in 2007.

Could it be that they just let the borrower continue with teaser rates etc....

How can we find out ?

Even the consumer knows that all is needed is to use credit:

"A jump in consumer spending last quarter was one of the few things that kept the expansion alive. The increase in spending, which accounts for about 70 percent of the economy, was revised up to an annual rate of 4.4 percent, the biggest gain in a year, from an initial estimate of 3.8 percent. "

Checki comments contintued (thank you Haloscan):

"On incentives to build up leverage:
We know that low interest rates, low volatility and the
seeming ability to trade out of almost any risk position create
an obvious incentive to build up leverage, often in ways that
aren't transparent.''
Leverageintroduces the scope for large and sudden
reversals when cycles turn.''
And unfortunately leverage is something we measure least
well where it counts most.''Not many of the intermediaries I speak to think risk is
well priced. That shows how sensible they are.''

On links between markets and structured products:
Financial markets are much more tied together today than
they were in the past by way of relationships'' through
structured products.These structured products are fantastically
complicated.''
It is not at all clear today, in the event of distress,
who will own the problem.''It's easy to price and insure against risk, although it's
only in retrospect that investors will know whether they have
purchased as much insurance as they thought.''
People who are relying on the performance of credit
derivatives and underlying credit are likely to be surprised and
disappointed.''Experience with foreign investments in local debt
securities hasn't always been happy: Think Mexico in '94 and
Russia in '98."

Sears earnings.

Sears Sales Decline; Profit Trails Analyst Estimates (Update4) - Bloomberg.com

A dividend from an investment in Mexico, insurance money from stores damaged by 2005 hurricanes, a legal settlement and other one-time items boosted profit by $44 million, or 30 cents a share. Sales at locations open at least a year fell 3.9 percent on less demand for home appliances at Sears and slower sales of health and beauty products at Kmart.

abhi: I believe that this has to do with the nature of how MEW (mortgage equity withdrawal) is spent. Big ticket items (vehicles, plasma screens, major remodels) tend to be either bought with heloc money immediately or with equity liberated after a REFI.

But consumer debt pain won't really throw the economy into a tailspin until those who simply don't live within their means can no longer charge the difference between what they want and what they can afford. Alot of MEW has gone to pay off CC debt. Many people simply spend more than they earn, not on big ticket items but on every day life. The ability of HELOC and REFI their way out of credit card debt has given them the illusion that they can afford the lifestyle to which they have become accustomed. Many of THEM won't hit the wall until their cards are maxed out and they can no longer roll high intrest CC debt into their mortgage. That's when the REAL pain will be felt, not when they have to forego big ticket itmes, but when they have to significantly lower their monthy expenses and service their debt at CC interest rates.

Sooner or later the slowdown in debt growth here and elsewhere is going to have an impact on economic growth:

In the UK:

U.K. Home-Loans Drop as Credit Reaches Decade-Low (Update2) - Bloomberg.com

and in Ireland:

"Irish April Mortgage Loans Grow Least in Almost Five Years
2007-05-31 06:05 (New York)

By Fergal O'Brien
May 31 (Bloomberg) -- Irish mortgage lending grew at the
slowest pace in almost five years in April as rising borrowing
costs deterred homebuyers, cooling a decade-long property boom."

Sorry, no link for the second piece.

Jim,

No limit on CC. they would just raise the limit.

It is like option ARM as long as people make the minimum payment they can go on for ever.

It's not that hard to see what's most likely to happen next, you simply analyze the conditions in an objective way.

Sebastien - you are so FOS it is funny... you say crap like that and 'no crash', that you've analyzed it all then give ZERO evidence or work... just the same statement over and over.

When I was grading undergrads I'd give'em a 'D' if they were lucky for that leveel of effort.

A statement made over & over isn't evidence nor does it constitute a proof.

It doesn't take much to post analysis either and throw it out for people to challenge - CR does.

Until then EVERYTHING you write is nothing more than opinion. And I think opinions are fine, just like assholes, everybody has one.

dryfly said: "Sebastien - you are so FOS it is funny... you say crap like that and 'no crash', that you've analyzed it all then give ZERO evidence or work... just the same statement over and over..."

But I have. I long ago explained what I look at as indicators, and repeated them from time to time.

In no particular order: Extremely poor job creation in the monthly non-farm payrolls number, inflation above 4.25% and rising, negative year-over-year growth in durable goods orders, two consecutive quarters of falling SP500 TTM EPS growth, manufacturing weakness, inverted Wright Model "B" yield curve.

Not one of these conditions exist, and if recession was on the way there would be problems in at least a couple of areas.

Respectfully, if you haven't done your homework and don't think it's worthwhile to make a serious effort, you aren't really qualified to pass judgment on mine.

Based on the indicators listed above, no 400k-600k in residential construction job losses this year, no recession this year, no housing "crash" this year. Not because I say so, but because the data says so.

Sebastia

dryfly said: "You explain nothing - just make statements. Show the work, the number crunching..."

Respectfully, I'm not your f**ing student. And if you were my teacher, your unsubstantiated opinions wouldn't set a very good example. The fact that you are absolutely unwilling to make a serious effort to look at *any data that doesn't confirm your opinion really doesn't set a good example.

Your demand that I "show my work" after all the rude and obnoxious posts from you and others here is the absolute height of outrageously lazy, spoiled-rotten behavior. Respectfully.

I've explained what the indicators are, quite a step up from the vast majority of posts here. All of the data for them are available for free off the Internet. Anyone willing to do the work I did in gathering the data all in one place and analyzing it is free to do so, and will justly deserve the fruits of his/her labor: More-timely recession forecasts than on any bearish blog, including this one.

My "opinion" didn't come first, with the confirming data coming second. I looked at the data, and that formed my viewpoint.

That's why my "opinions" are going to prove-out. I'm not smarter, I just have better data.

Sebastia

Dryfly and Sebastian...

You 2 make me feel like I'm stuck in a closet with my kids... sends shivers down my spine just thinking about it...

Now let's shake hands and agree to let people have their own opinions, however different from our own they may be.
:>